Update of the S&P 500 Index

This will be a brief update, since all items for the week should have been
addressed yesterday. Notice the red circles at each of the prior tops during
the past 2 ½ years. Each top of significance has had the upper 55 MA
Bollinger band rise well above the index and decline. The current top had no
such event, although a negative divergence in the charts since January 2006
was developing. The 50% retracement of the past decline lies at 1250. A move
below this level will likely place mounting evidence a top is in place. The
%K is beneath the %D below the lower horizontal trend line. Declines to prior
levels have had healthy bounces, so before we draw any conclusions, lets wait
for a bottom to be placed in over the next 3-5 days and see what the bounce
looks like. Calling a top by many may seem genius but I remind myself many
have been calling for a top the past 2-3 years. This makes their calling a
top if successful here irrelevant because a broken clock is right twice per
day. To call a top now is the same logic and I would recommend the market show
what is going on. Due to the uncertainty if a top has formed, wait to see what
happens after a bottom is in place. If the move up only has a partial retracement
of the decline or forms a double top, then a shorting opportunity exists. Many
have tried to short the market all the way up and have had their heads handed
to them so many times you'd assume their bodies have remarkable regenerative
abilities.

Figure 1

Red lines on the right-hand side represent Fibonacci price projections based
upon uptrending wave price action projected off the subsequent lows. Areas
of line overlap form Fib clusters that represent important support/resistance
levels. An important Fib support level lies at 1239. A decline to this level
implies a top has been put in and a shorting position lies ahead of a partial
retracement. Full stochastics have the %K dropping like a stone beneath the
%D. The %K broke below a wedge in place since December 2006, so this was to
be expected if it occurred. Moving averages are still in bullish alignment
(50 day MA above the 155 day MA above the 200 day MA), with the 200 day MA
at 1257 (4 points below yesterday's close). This is another big reason why
I view 1250 as the line in the sand for trend determination.

Figure 2

The weekly S&P 500 Index is shown below, with Fib time extensions of the
decline shown at the top of the chart and Fib price retracements of the decline
shown on the right hand side. The S&P has moved within Fib channels for
the past 3 ½ years, so this trend is likely to continue. Interestingly,
the 61.8% Fib retracement lies at 1239 (this level was a Fib cluster from the
prior chart). So, 1239 will definitely serve a key bottom if 1250 is taken
out, but what likely would happen at this point is the development of a right
shoulder prior to the S&P plummeting down to 1141 during the next phase
of the decline. A change in trend will see the S&P go down in three phases
to match the Fib channel moves from mid 2003 until present, much like the advance,
but at a much more compressed time scale. The %K has fallen beneath the %D.
The weekly charts indicate no negative divergence like the dailies. Notice
the 2000 top had a huge negative divergence in place. If a wedge is forming,
a negative divergence pattern must be eliminated because the wedge structure
has a higher probability for determining the trend. If the upper trend channel
of the wedge is taken out by the %K in the coming 3-4 weeks, then there is
a problem. The prior two charts however, suggest a bottom is 3-5 days away.

Figure 3

The mid-term Elliott Wave count of the S&P 500 Index is shown below. This
is the only Elliott Wave chart today, because it is the only relevant time
frame. The decline is classified as wave [c] of a flat structure. If 1250 is
taken out, then wave [b] becomes (G).[W] and wave [X] lasting 8-12 months at
a minimum is underway. If a bottom is placed above 1250 on a closing basis,
an impulsive move in wave C will occur to approximately the same price dimensions
as wave A, or up to approximately 1350-1380. The course of the next 5 trading
days will forge the course of the next few years, so hang tight. The index
should bottom in mid to late 2007 around 1050, the 38.2% retracement of the
decline. Currently energy stocks and precious metal stocks represent approximately
5% and 2% of the S&P 500, respectively. By time 2009/2010 rolls around,
the S&P is likely to be at 1600-1800, with a weighting of 25-30% energy
stocks and 17-23% precious metal stocks. Indices are fluid and change with
the time, so another reason why the S&P 500 Index will hit new highs in
3-4 years and why it will not decline below 1000.

Figure 4

That is all for now. I will update the USD index and 10 Year US Treasury Index
on Monday. Have a good weekend all.

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